CONTENTS:

BANK BOARD BUREAU

BOARD OF FINANCIAL SUPERVISION (BFS)
STRUCTURED FINANCIAL MESSAGING SYSTEM (SFMS)
SWIFT (SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL
TELECOMMUNICATION) CODE
IMMEDIATE PAYMENT SERVICE (IMPS)
CREDIT RATING AGENCIES IN INDIA
MARGINAL COST OF FUNDS BASED LENDING RATE (MCLR)
BANK BOARD BUREAU
Finance minister Arun Jaitley announced in August 2015 the plan to set up the Banks Board
Bureau (BBB) as part of the Indradhanush programme to revamp state-run banks. In
February 2016, the proposal of the Department of Financial Services (DFS) for the
constitution of the Banks Board Bureau was approved and thus the bureau was established.
Former CAG Vinod Rai was appointed as the first chairman of the bureau.
About BBB:
The bureau was set up as an autonomous body. It will have three ex-officio members and
three expert members, in addition to the Chairman.
Important functions performed by the Bureau:

Recommend appointments to leadership positions and boards in PSBs and advise

them on ways to raise funds and how to go ahead with mergers and acquisitions.

Constantly engage with the boards of all 22 public sector banks to formulate
appropriate strategies for their growth and development.

Search and select heads of public sector banks and help them develop differentiated
strategies of capital raising plans to innovative financial methods and instruments.

Be responsible for selection of non-executive chairman and non-official directors on

the boards.

Steer strategy discussion on consolidation based on the requirement.

Background:
This idea was first mooted by a committee set up by the RBI to review the governance of
bank boards. The committee was headed by former chairman and managing director of Axis
Bank Ltd P.J. Nayak. In May 2014, the committee suggested the formation of the bureau as a
first stage in a three-phase process to empower the boards of public sector banks.
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The committee noted that the bureau would advise on all board appointments,
including the whole-time directors and the top bank management, to professionalize
and depoliticize the appointment process.

The members of the bureau would have a tenure of three years or until powers are
passed on to the bank investment company, whichever is shorter, and their
remuneration would at least be on a par with the senior bank chiefs, the panel had
recommended.

Why this was a good idea?

The bureau has been set up at a time when public sector banks are grappling with a huge
problem of bad loans with their collective gross NPAs (Non Performing Assets) approaching
Rs. 4 lakh crore level. Saddled with a large pile of bad assets, public sector banks need
dollops of capital. They also need to focus on sharpening efficiency and strengthening
corporate governance. The Bureau is mandated to play a critical role in reforming the
troubled public sector banks.
What else needs to be done now?

Create a holding company to manage the governments stakes in the public sector
banks and facilitate consolidation in the sector.

Open up the banking sector further and explore options of allowing different types of
banks to set up shops.

The bureau should also have a say in the selection of independent directors of boards
without which it will be difficult to help these banks develop strategies and raise
capital as many directors on the boards of various banks neither understand strategy
nor do they lend credibility to their institutions.

Challenges:
The investment company can be set up only after legislative changes. For instance, the Bank
Nationalisation Acts of 1970 and 1980 and the SBI Act and the SBI (Subsidiary Banks) Act
need to be repealed and all banks need to be incorporated under the Companies Act ahead of
this. This is a long-drawn process.
Conclusion:
It will not be easy to raise capital unless the government plans to overhaul the way public
sector banks operate and this cannot be done by merely asking the bureau to select bankers
for the top jobs. The government must clarify whether it is an intermediate step towards
setting up the investment company, and if it is, then the scope of work must be widened to
include the appointment of independent directors of the board, as envisaged by the Nayak
committee. It also must look at the tenure of the managing director and the chief executive
and the compensation of senior bankers, among other things. Finally, the process of
appointment must also change.
BOARD OF FINANCIAL SUPERVISION (BFS)
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The Board of Financial Supervision (BFS) was constituted in November 1994 as a committee
of the Central Board of Directors. Its objective is to undertake consolidated supervision of
the financial sector comprising commercial banks, financial institutions and nonbanking finance companies. The RBI carries out its functions related to financial
supervision under the guidance of BFS. It is chaired by RBI Governor, who is supported 4
co-opted directors as members for a 2 year term. One of the deputy governors of RBI serves
as Vice Chairman BFS. BFS meets typically every month.
BFS Regulates and supervises commercial banks, Non-Banking Finance Companies
(NBFCs), development finance institutions, urban co-operative banks and primary
dealers. Some typical functions are: Restructuring of the system of bank inspections
Introduction of off-site surveillance, Strengthening of the role of statutory auditors and
Strengthening
of
the
internal
defences
of
supervised
institutions.
STRUCTURED FINANCIAL MESSAGING SYSTEM (SFMS
Structured Financial Messaging System (SFMS) is a secure messaging standard developed
to serve as a platform for intra-bank and inter-bank applications. It is an Indian standard
similar to SWIFT (Society for World-wide Interbank Financial Telecommunications) which is
the international messaging system used for financial messaging globally.
SFMS can be used for secure communication within the bank and between banks. The SFMS
was launched on December 14, 2001 at IDRBT. It allows the definition of message structures,
message formats, and authorization of the same for usage by the financial community.SFMS
has a number of features and it is a modularized and web enabled software, with a flexible
architecture facilitating centralized or distributed deployment. The access control is through
Smart Card based user access and messages are secured by means of standard encryption and
authentication services conforming to ISO standards.
The intra-bank part of SFMS is used by banks to take full advantage of the secure messaging
facility it provides.[citation needed] The inter-bank messaging part is used by applications
like electronic funds transfer (EFT), real time gross settlement systems (RTGS), delivery
versus payments (DVP), centralized funds management systems (CFMS) and others. The
SFMS provides application program interfaces (APIs), which can be used to integrate
existing and future applications with the SFMS. Several banks have integrated it with their
core or centralized banking software.
SWIFT

(SOCIETY

FOR

WORLDWIDE

INTERBANK

FINANCIAL

TELECOMMUNICATION) CODE
It is a unique identification code for both financial and non-financial institutions approved by
the International Organization for Standardization (ISO). SWIFT Standards, a division of The
Society for Worldwide Interbank Financial Telecommunication, handles the registration of
these
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codes.

It

is

an 11-character

code.

SWIFT Codes are used when transferring money between banks, particularly for international
wire transfers, and also for the exchange of other messages between banks in a secure
standardized

and

reliable

environment.

So to do overseas funds transfer, the SWIFT Code of the particular bank is required.
The components of SWIFT code are:

The first four alphabetic characters representing the bank name,

The next two alphabetic characters represent the country name

The next two letters or digits represent the location code, and

The last 3 letters or digits represent the branch code.

Example: SWIFT Code of a branch of Punjab National Bank in Delhi is PUNBINBBDRG

*Note: Not all bank branches have individual SWIFT codes, so if it is not available for your
branch, you can use the SWIFT code of a nearby branch of same bank. SWIFT code is also
known as Bank Identifier Code (BIC).
A SWIFT code is an international bank code that identifies particular banks worldwide. Its also
known as a Bank Identifier Code (BIC). Commercial Bank uses SWIFT codes to send money to
overseas banks.
A SWIFT code consists of 8 or 11 characters.
Commercial Bank's SWIFT code is CTBAAU2S. Youll need to give this code to anyone sending
money to you from overseas. The code is made up of letters and numbers as follows:

SWIFT codes and BIC codes are the same thing and the terms are interchangeable. Other terms
used by banks overseas include:

CHIPS (Clearing House Inter-Bank Payment System) US and Canada only

IMMEDIATE PAYMENT SERVICE (IMPS)

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Immediate Payment Service (IMPS) is a tool through which one can transfer money
instantly within banks across India through mobile, internet and ATMs which is not only safe
but also economical both in financial and non-financial perspectives. This facility is available
24x7x365. The IMPS facility is provided by National Payments Corporation of India (NPCI).
Why IMPS was started?
Before IMPS system, the transactions could be done either by NEFT or by RTGS. And this
can also happen in NEFT and RTGS working hours. So NPCI along with some banks like
SBI, BOI, UBI and ICICI in 2010 conducted a pilot study to create a system that works 247.
As a result, IMP public launch happened on 22nd November 2010 by Smt. Shyamala
Gopinath, DG RBI at Mumbai and this service is now available to the Indian public.
The participants for IMPS are:

Remitter (Sender)

Beneficiary (Receiver)

Banks

National Financial Switch by NPCI

Objectives of IMPS

To be customer friendly so that customers do not have to wait for tomorrow to

make remittances.

To make the payment simpler just with the use of mobile number.

To achieve digitization in doing retail payments.

To build the foundation for a full range of mobile based Banking services.

Some important facts:

The bank should have an approval from RBI for Mobile Banking Service to be
eligible to participate in IMPS.

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Customer should do Mobile Banking Registration if he wants to transact through

mobile.

The customer gets a unique Mobile Money Identifier (MMID) which is one of the
inputs to start the transaction. It is a 7 digit number issued by banks.

Every mobile phone be it a basic phone or smartphone is eligible for IMPS.

There is no need of bank account to avail IMPS.

More than one account can be linked to single mobile number.

The recipient is not required to register for IMPS.

Individual banks can also charge money for IMPS as per bank policy.

CREDIT RATING AGENCIES IN INDIA

A credit rating agency is a company which rates the debtors on the basis of their ability to
pay back the debt in timely manner. They rate large scale borrowers, whether companies or
governments.
There are three big credit rating agencies in the world which areStandard and Poors (S&P),
Moodys and Fitch Ratings.
There are mainly 4 credit rating agencies in India which are
Credit Rating and Information Services of India Limited (CRISIL)

It is Indias first credit rating agency which was incorporated and promoted by the
erstwhile ICICI Ltd, along with UTI and other financial institutions in 1987.

After 1 year, i.e. in 1988 it commenced its operations.

It has its head office in Mumbai.

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It is Indias foremost provider of ratings, data and research, analytics and solutions,
with a strong track record of growth and innovation.

It delivers independent opinions and efficient solutions.

CRISILs businesses operate from 8 countries including USA, Argentina, Poland,

UK, India, China, Hong Kong and Singapore.

CRISILs majority shareholder is Standard & Poors.

It also works with governments and policy-makers in India and other emerging
markets in the infrastructure domain.

Investment Information and Credit rating agency (ICRA)

The second credit rating agency incorporated in India was ICRA in 1991.

It was set up by leading financial/investment institutions, commercial banks and

financial services companies as an independent and professional investment
Information and Credit Rating Agency.

It is a public limited company.

It has its head office in New Delhi.

ICRAs majority shareholder is Moodys.

Credit Analysis & Research Ltd. (CARE)

The next credit rating agency to be set up was CARE in 1993.

It is the second-largest credit rating agency in India.

It has its head office in Mumbai.

CARE Ratings is one of the 5 partners of an international rating agency called

ARC Ratings.

ONICRA
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It is a private sector agency set up by Onida Finance.

It has its head office in Gurgaon.

It provides ratings, risk assessment and analytical solutions to Individuals, MSMEs

and Corporates.

It is one of only 7 agencies licensed by NSIC (National Small Industries

Corporation) to rate SMEs.

They have Pan India Presence with offices over 125 locations.

Apart from these credit rating agencies, there are three more credit rating agencies which are
also registered with SEBI. These are Fitch Ratings India Private Ltd., Brickwork Ratings
India Private Limited, SME Rating Agency of India Ltd. (SMERA).
Note:

Out of four credit rating agencies, CRISIL, ICRA, CARE and ONICRA, ONICRA
is a private sector agency, all others are public sector companies.

There are 6 credit rating agencies which are registered with SEBI. These are
CRISIL, ICRA, CARE, Fitch India, Brickwork Ratings, and SMERA.

MARGINAL COST OF FUNDS BASED LENDING RATE (MCLR)

Last year, RBI has directed banks to calculate their respective base rate based on marginal
cost of lending funds which was previously calculated on other factors as per bank ease.
Firstly what is base rate?
Base rate is the rate which is decided by respective banks below which they cannot
lendcredits to individuals or businesses except in the cases allowed by RBI. It is different for
each bank. RBI does not decide the base rate for banks, but banks themselves decide the base
rate following a certain methodology.
Before 2010, there was Benchmark Prime Lending Rate (BPLR) system. Under this banks
were allowed to lend loans to their most trust worthy customers at a low rate. But this system
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was not transparent. Banks used to lend to big businesses in order to increase their business
and the low income people could not have the credits easily.
So in 2010, banks were advised by RBI to apply the system of base rate i.e. below this rate
banks will not be able to lend credits, except in the cases allowed by RBI. Banks were
provided with various parameters to calculate their respective base rates. These parameters
include average cost of funds, marginal cost of funds or any other methodology which
seemed reasonable.
This was a good step by RBI which allowed transparency in the loan credit system. But then
banks used to change their methodology as when they wanted and which provided them with
more ease and convenience.
Whenever the RBI cuts the repo rate, same has to be done by banks also in their base rates,
but they lower the base rate in small because most banks currently follow average cost of
funds based calculation for arriving at respective base rates. This is the main reason for
changing the policy to Marginal Cost of Funds based Lending Rates (MCLR).
Now again changing the policy, RBI had directed banks to change their methodology to
Marginal cost of Funds to calculate the base rate.
What is marginal cost of funds?
They are the funds which banks have to give to its customers and RBI instead of investing
them in other ways.
The main components of MCLR are:

Marginal Cost of Funds: Customers deposit money in savings account, fixed

deposits, recurring deposits and foreign currency accounts and banks have to give
interest on these amounts. Interest given on short term borrowings from RBI in the
form of repo rate

Negative carry on account of CRR: Banks have to keep a part of their deposits
with RBI which is known as Cash Reserve Ratio (CRR). RBI does not give any
interest for these deposits, banks can use these funds to provide loans and earn
interests.

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Operating Costs: Operating costs associated with ATMs, providing loans,

infrastructure, raising funds, etc.

Tenor premium: The loans which are given for longer terms or have longer tenor
period. MCLR would be based on these longs terms rate also.

These 4 parameters decide the funds which could have have been invested by banks other
than giving to the customers and RBI. In new system also, like base rate, banks can not lend
below a certain benchmark.
Some of the guidelines on MCLR

Loans covered by government schemes, where banks have to charge interest rates
as per the scheme are exempted from being linked to MCLR.

Like base rate, banks are not allowed to lend below MCLR, except for few
categories like loans against deposits, loans to banks own employees.

Fixed Rate home loans, personal loans, auto loans etc., will not be linked to
MCLR.

MCLR would be effective after April 1, 2016, so all new loans will be given based
on the new system after April 1, 2016.

Existing customers will also have an option to shift to the new regime with some
conditions.

Banks have to review and publish their MCLR of different maturities every month
on a pre-announced date.

The new measures will add further transparency in the methodology followed by
banks for determining interest rates on advances.

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